Signed PO--have concerns - Posted by Kathy

Real Estate Investing
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Posted by Kathy on April 04, 1999 at 23:02:39:

The reason for the estimated $150 cash flow is because the rent really is too high, especially for that area. The average rent a person around here pays is 450-500 a month total so $500 plus electric is a bit steep. I used a monthly rental income on the down side, at $425/ mo each for my estimate, in case I couldn’t get so much as 475-500. Just being on the cautious side in my figures! Worse case senario, so to speak. I don’t feel the numbers are at all bad on this even at that rate, compared to about 20 others I’ve analysed. It’s not the money I’m worried about, but the area and likely candidates for prospective tenants! Thanks for you input!

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Signed PO–have concerns - Posted by Kathy

Posted by Kathy on April 03, 1999 at 14:21:53:

Any one ever bought a duplux on the BAD side of town and had GOOD renters? Offered 29,900 on duplex reduced from 39,900 to 34,900. Wanted 7-10k down because burned last time. Settled at 32,900 with 6k down, 10 year C/D with 5 yr. balloon. Cash flow once totally occupied should be $150/mo.
Yes, this is a cheap purchase price! One of the reasons (maybe the only) is because it is not a very good part of town. Not the WORST, but not good.
Average cost of duplexes in (Duluth) Minnesota is 60,000, and they are dumps.

Also, undesireable tenants upstairs on a mo-to-mo lease. Called police department and there have been about 10 responses to the address in the last 6 months, since they’ve lived there. Do have ideas, one just found on www.mrlandlord.com about a reporting agency (check it out!) Before seeing that, I considered offering them a $50/mo. rent credit if no complaints to police or myself during the proceeding mo. (Rent is overpriced by that much, at least). Then we would try to evict them after the downstairs was rented. It needs quite a bit of cosmetics anyway.

Downstairs was left vacant for the sale. We have contingencies; besides another inspection and seeing her rent history, we have two weeks to advertise and try to obtain satisfactory tenants. We want to see if we have any desireable tenants willing to rent in this area. If we find a good one the seller will likely agree and they can move in regardless.

What would you all do? Would anyone willingly go into this type of situation where there may be a lot of headaches, at best? I guess our potential tenant applicants will tell give us a good indication of the type of people we’d be dealing with, but thought maybe someone has experienced this type of thing.

Thanks in advance for any suggestions or recommendations!!

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Re: Signed PO–have concerns - Posted by Laure

Posted by Laure on April 03, 1999 at 19:37:23:

I had two buildings, 4 units each, that sat side by side. It was the same kind of area you are talking about. The rents were dirt cheap when I bought it. I fixed them up with nicer bathrooms, wallpaper in the kitchens and carpet where needed. I doubled the rents…even in a bad area. People will pay more to live in a nicer place. YES… you WILL have problems with Tenants. And there will be days you wish you’d never have bought the place. I ended up making a bundle on my buildings. With the higher rents, and a higher cash flow, a new investor jumped right at them. I owned my buildings for 4 years before I sold them. I agree with the other post, that your rents are too low…way, way, way too low. If I was buying the building, I would evict that bum upstairs immediately and eat the cash flow. You will never get or keep a decent Tenant downstairs with a trouble maker up… been there, done that, even have the t-shirt (sorry, couldn’t help myself) Start fresh with YOUR Rules. Lay down the law to all new Tenants. Let them know UP FRONT not to mess with you, because you WILL evict them for violating “quiet enjoyment”.

Hope I helped.

Laure :slight_smile:

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Re: Signed PO–have concerns - Posted by Tim Jensen

Posted by Tim Jensen on April 03, 1999 at 16:17:35:

Kathy,

My biggest problem with the place is the cashflow. I feel that $150 a month is not enough. In the undesirable area, I like to make at least $250 a month. A lot of times these places are a management headache. The tenats do not know how to respect each other.

I have a question. How is that you are only paying 30k and you only get $150 month positive cashflow?
It sounds like rents are too cheap.

If I bought this place, I would look into renting through section 8.

One last question, if you are going to put 6k down why not go to the bank or a mortgage broker that can get you 10% down owner financing?

Good Luck,

Tim Jensen

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Re: Signed PO–have concerns - Posted by phil fernandez

Posted by phil fernandez on April 03, 1999 at 15:36:54:

Just my opinion, but I don’t like to deal with problems if I can avoid them. Upstairs tenant has all the potential of big future problems. What if they get upset with you and don’t pay the rent for six months while you are trying to evict them. Sounds like the type of tenants that would and could trash the place. What’s it going to cost to rehab the unit.

Probably the biggest reason I don’t like problems is that it robs you of your time, energy and creative juices that you could apply to other profitable deals.

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Re: Signed PO–have concerns - Posted by Kathy

Posted by Kathy on April 04, 1999 at 01:18:37:

Thank you all for your valuable advice. I still welcome more! The first thing you all think is that the rent is too low because of the cash flow (150/mo). That is not the case. They are on the high side. The problem tenants are paying $500/mo. plus electric. What brings the cash flow down is owner pays utilities, which I well accounted for at (monthly)
$100 heat
$30 garbage
$34 water/sewer
$10 advertising,
$84 maintenance
$62 taxes
$37 insurance

I think it’s a good estimate on what I don’t have actual figures on (maintenance, heat), not counting rehab.

I know the majority of you don’t like to buy places that aren’t tenant-paid utilities, but there’s not much to find around here. Another owner said tenant-paid, but turns out what he does is divies up the bills between # of tenants in each apt. and goes and collects separately from rent – no thank you!

The reason for the contract is because I’d like to take what I can get that way and save the banks for those I can’t get on contract. Also, no closing costs and all that garbage. I don’t think cashflow is bad. Better than most I’ve analysed. I usually come up with a negative figure of $50/mo. because I am considering a bank loan at 80% and seller financing for the 20%, which the banks won’t go for anyway. This means two mortgages, which eats cashflow. That always seems to be my problem. If I’m looking at something in the $60k range, I need at least $12,000 down plus the extras and none of the creative techniques has worked for me.

You may be right that the headaches, time and energy are worth more than the $150, though. I’d rather do without that part of it. Not to mention the cosmetic $$ I feel are needed. The downstairs doesn’t need much but the upstairs will take a bit.

Anyway, that should answer all the “WHYs”. So now that you know more details, what do you all think? It’s starting to sound less appealing to me after hearing from all of you. That’s good, even though it’d be a bummer calling up the agent and backing out. However, he does know we’re concerned about the tenant issue and neighborhood so wouldn’t be totally surprised!

One more thing–C.Sheets etc. have said ANY cashflow is good. Certainly looks more attractive when mortgage is paid off - shouldn’t you be looking at long term as well as the immediate?

Thanks again!

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Re: Signed PO–have concerns - Posted by Reif

Posted by Reif on April 04, 1999 at 07:58:59:

Kathy,

Maybe you better go over the numbers again and give them to us, specifically the terms of the contract. If you’re paying on a 26.9K note at 8% for 10 years, that is only $326/mo. Your expenses look like 357/month. If you’re getting $1000/mo. ($500 ea, up and down) rents, that’s 317/month cash flow, or 63% cash on cash on your six grand, which is pretty good from strictly a numbers point of view.

Can’t comment on what bad tenants cost. That’s another decision.

Reif